Where is Venture Capital headed in 2020 and beyond? How can VCs prepare for emerging trends? What will it take to thrive in this field in the new decade? Today’s blog will tell you exactly what you need to know.
We spoke with Jim Vaughan, Managing Principal of VCapital Management about what to expect from Venture Capital in the 2020s.
BCC: How do you think the VC world will evolve in the next decade?
Jim: Traditional markets have changed and become more correlated with each other. There’s a tremendous appetite for alternative investments, and venture capital would be one of those in demand from individual investors.
While demand is high, there are relatively few avenues for high net worth investors to gain access to institutional quality opportunities at reasonable fees and minimums. Deals are plentiful and will become more available to less sophisticated investors through vehicles like bulletin boards and crowdfunding groups.
That said, while this makes sense from an efficiency standpoint and works for some sponsors, the jury is still out from a return standpoint, as more often than not the level of due diligence necessary to succeed on a consistent basis is not present.
BCC: What trends can VC professionals expect?
Jim: There’s a huge amount of angel and seed money out there; all the universities have seed funds and angel investment clubs have been able to create leverage through different affinity groups.
At the same time, there is an enormous amount of late-stage capital, driven primarily by the institutional-focused funds, which have raised large pools. Due to their size, these large funds often focus on later stage investments where they are able to make larger investments and have shorter time to exit.
As a result, we see significant opportunity in the Series A and Series B space, in particular, Series A. It’s often joked that that’s where good companies go to die because of the dearth of capital and it takes a tremendous amount of effort to sort out good deals from bad ones. Many VCs aren’t willing to spend the time and resources necessary to vet really disruptive technologies when the typical investment allocations are relatively small. There is a low success rate in Series A, so rigorous due diligence is paramount in our view.
BCC: What are some other trends in VC that you’re seeing right now?
Jim: Companies that have garnered a lot of media attention like Uber and Lyft are waiting longer and longer to go public, using VC as a private-public market and raising huge amounts of capital. That’s never really been what VC’s about. The longer they wait, the more impetus there will be for late-stage funders to invest and valuations can reach thin-air altitudes. I believe this trend will continue to some extent and you’re going to see some spectacular blowups. For example, WeWork had an enormous valuation and cratered in a week, which calls into question the judgement that led to those investment decisions along the way.
It creates a great opportunity for smaller, more nimble organizations that can invest in high quality companies, early in their growth cycles and don’t have to raise huge sums to reach the finish line. Those acquisitions so often go under the radar, but make for multiples that are very attractive.
Bottom line, in order to compete and win, firms will have to be great at sourcing and vetting deals and have the fortitude to wait out relatively long investment cycles. I remain cautiously optimistic on the asset class as a whole and feel that the chasm between top performers and the bottom few will be farther apart than ever before.
BCC: What can VCs do to prepare for upcoming changes so that they thrive in the coming decade?
Jim: The key is figuring out what you do well and really focus on that, whether that’s focusing on a particular industry, market sector or stage of investment. VCs who will have difficulty are those who try to be all things to all people. Focus on what you do well.
The ones who will see great returns are those who can find great deals early on in the cycles and bring more to the table than just funds. Actively partnering with entrepreneurs to assist, mentor, and coach them to a successful outcome is essential.
BCC: What are one or two of the most exciting innovations in VC?
Jim: There are two that come to mind. The first is in what we’re seeing with medical deals—breakneck speed, the FDA approval process that has become remarkably cooperative to the point where we look at them more as a partner than an obstacle. This appears to be a seismic shift in medical deals, both with device and pharmaceuticals. Whether this continues to improve in the current political climate remains to be seen.
The second relates to AI. Computing power and making computers think like human beings is coming, and with it are a lot of interesting opportunities in this space. It’s going to enhance productivity improvements by leaps and bounds but there will be a tremendous amount of disruption involved.
BCC: What is one preconceived notion that the general population has about VC that may not be correct?
Jim: It’s the perception that venture capital is a high-risk, high-return, binary outcome. In reality, that’s not always the case, as it can, in fact, be less volatile. A 400-point day in the market used to make the front page news; now it’s not even mentioned.
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